Ned Davis Research: Czech Republic, Poland Look Cheap

By Ben Levisohn

Bloomberg News

Looking for another reason to be bullish on stocks in 2013? Ned Davis Research has one for you: They’re cheap.

The Ned Davis strategists define cheap as the difference between a country’s earnings yield (the reciprocal of its price/earnings ratio) and its 10-year bond. And based on this measure some emerging markets are among the cheapest.

The Czech Republic, for instance, is the cheapest, with an earnings yield of 11.3% and a 10-year yield of 1.97%, for a difference of 9.33 percentage points. Poland is third, with a difference of 8.74 points, and South Korea is the eighth cheapest on this measure, with a difference of 5.72. ( Kopin Tan recently looked at other measures of Korea’s cheapness in Barron’s magazine.)

Valuations such as these should help boost markets in general 2013: “We expect to be seeing double-digit gains on most indices globally,” Ned Davis Research’s strategists say.

I’m generally not a big fan of these types of analysis. The strategists, however, also use earnings estimates as a measure of market sentiment, as countries with lower earnings forecasts generally outperform. By this measure, Poland and the Czech Republic also score high. While earnings have grown by more than 20% during the past 12 months, analysts earnings to drop by 8% and 1.1% respectively. That could be good news for those two markets, if analysts turn out to be too pessimistic.

Czech doesn’t have a dedicated exchange-traded fund, but for investors looking to invest in Poland, there’s the iShares MSCI Poland Investable Market (EPOL) ETF. The iShares MSCI South Korea (EWY) ETF is the largest Korea ETF.

About Emerging Markets Daily

Emerging markets have been synonymous with growth, but the outlook for individual nations is constantly changing. Countries from Brazil and Russia to Turkey face challenges including infrastructure bottlenecks, credit issues and political shifts. Barrons.com’s Emerging Markets Daily blog analyzes news, data and research out of emerging markets beyond Asia to help readers navigate the investment landscape.

Barron’s veteran Dimitra DeFotis has been blogging about emerging market investing since traveling to India and Turkey. Based in New York, she previously wrote for Barron’s about U.S. equity investing, including cover stories and roundtables on energy themes. Dimitra was among the first digital journalists at the Chicago Tribune and started her career as a police reporter at the Daily Herald in the Chicago suburbs. Dimitra holds degrees from the University of Illinois and Columbia University, where she was a Knight-Bagehot Fellow in the business and journalism schools. She studies multiple languages and photography.